The European Commission has published its long-awaited first draft for the EU’s first sustainability reporting standards for consultation this month, and green-minded investors associations are not happy about what they have seen.

“We are deeply concerned by proposals to move away from mandatory disclosure of key reporting requirements,” Emily Murrell, from the Institutional Investor Group on Climate Change, explained following the draft’s publication. “We see this as a significant rollback of ambition compared to that envisaged by the European Financial Reporting Advisory Group (EFRAG) [in November 2022].”

The EFRAG stakeholders group was convened last year to make recommendations for the standards, but the draft put forward by the Commission has gone against several of the recommendations. The reporting standards, part of a larger EU push to define sustainable investment within the financial sector, would require large companies to disclose data and information on the social and environmental risks they face, and how their economic activities affect climate, the environment and society, from January 2024. The goal is to create a single, universally accepted metric to measure what companies are doing and prevent false claims in company reports or investment offers, often called “greenwashing”.

Exceptions and delays

Under the draft published by the Commission, there would be a delayed phased-in approach for half of the standards for companies with less than 750 employees. These include all social standards and the biodiversity standard. For a number of climate and social metrics, companies will be able to determine themselves, through an internal assessment, what information is important enough to disclose. Some social issue disclosures have been made voluntary instead of mandatory, such as a company’s use of external agency workers. Planned biodiversity transition plans, which the advisory group recommended be made mandatory, are only voluntary.

NGOs and some investors groups are organising their responses to the consultation, which will close on 7 July, and will push for mandatory disclosure without companies being able to determine what is relevant. The Commission is expected to finalise the standards in August, based on the feedback from the consultation. “Leaving requirements subject to companies’ materiality assessment would undermine the purpose of the entire transparency framework and basically maintain business as usual,” says Giorgia Ranzato, sustainable finance manager with the NGO Transport & Environment. “We need relevant information to be available for investors and consumers to make informed decisions.” 

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The Alliance for Corporate Transparency has also come out against the draft standards, saying in a statement that the “full set of standards” proposed last year by the EFRAG “is essential for the achievement of the European Green Deal and the provision of consistent, comparable data for investors to make informed decisions”. They also lamented that the “multiple delays, lengthy debates and public announcements” has resulted in something that does not match what was recommended.

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EU sustainability reporting standards need to be clear

BusinessEurope, a large industry association in Brussels, has expressed concern that overly onerous reporting requirements will stifle economic growth and be particularly confusing for smaller companies. In their response to the EFRAG survey, it said mandatory reporting requirements across all environmental, social and governance areas would be disproportionate. “Even for well-experienced reporting organisations with long experience from using international ESG reporting standards, e.g. the GRI Standards, implementation of the draft ESRS standards are expected to require significant restructuring of the reporting approach and significant additional information required without necessarily improving the users need for information nor making the access to the information easier,” it wrote.

The standards will form the backbone of the EU’s new Corporate Sustainability Reporting Directive, which already entered force in January. The draft standards published this month will be followed by sector-specific standards in June next year.

“Large and most listed companies in the EU – including companies outside the EU with listed securities on an EU-regulated market – will be required to start adopting European Sustainability Reporting Standards in a matter of months,” Mark Vaessen, a partner with KPMG in the Netherlands, wrote in an analysis earlier this month. “The scope of large companies will expand progressively over the following years, ultimately also capturing non-EU parent companies with substantial activity and a presence in the EU. So, companies around the globe are preparing for these new requirements.”

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The standards will also be integral to the EU’s Corporate Sustainability Due Diligence Directive, which was passed by the European Parliament earlier this month but is still subject to negotiations with member states and will not become law for some time. A group of 36 industry associations, including from the chemicals, textiles, automotive, agriculture, tech and hospitality sectors, put out a joint statement ahead of the Parliament’s vote warning that “companies cannot be expected to focus on every single element of their value chains”.

“The European economy, including SMEs which will be impacted even if formally out of the scope, need a workable due diligence framework that is drafted in a balanced and proportionate way,” they wrote. “There should be no room for legal uncertainty and fragmentation which will hamper the possibility for European companies, already facing a legally complex and crisis abundant environment, to contribute to the sustainability transition.”

Overlapping legislation

There is also concern that the various EU sustainability laws either already on the books or working their way through the legislative process are going to be confusing for companies and result in contradictory requirements.

“European companies want to be a part of the solution and to achieve more sustainable supply chains,” says BusinessEurope director-general Markus Beyrer. “Due diligence rules need to be clear, workable, uniform at the EU level, and not contradicting or overlapping with the other sustainability legislation.”

The EU taxonomy for what can count as a sustainable investment, adopted last year, has already been subject to much controversy because it will allow for some investment in nuclear and natural gas. That taxonomy is another guideline, along with the standards, for how EU-based entities will need to define their investment activities in their corporate reports. NGOs and green-minded investor groups, already furious with the addition of nuclear and gas to the taxonomy adopted last year, say the same is repeating now with the sustainability standards.

“We are reminded by the latest IPCC report that climate change is a real threat and is exacerbating,” says Aleksandra Palinska, executive director of the European Sustainable Investment Forum. “Investors have been making considerable efforts to play their part in contributing to the transition towards sustainability, but everyone, including the reporting companies, must play their role. Otherwise, we risk not meeting climate neutrality targets.”